Survey Quartiles Are Not Salary Ranges, And I'll Tell You Why

Most professionally published salary surveys report, in addition to mean or average salaries, salary quartiles.

Quick stats lesson (with a little help from Wikipedia):  A percentile is the value below which a certain percent of pay rates fall for a particular reported survey job.  So the 75th percentile is the level below which 75% of the reported pay rates may be found.  The 25th and 75th percentiles are known as the first and third quartiles, respectively, and the 50th percentile is known as the second quartile or median. 

There is a tendency, a growing one in my experience, to simply lift the quartiles reported in a salary survey and use them - as is - as a de facto salary range for your job.  In the most common variation of this, the first quartile becomes the minimum, the median becomes the midpoint and the third quartile becomes the maximum.  While this is an easy (and apparently common) way to establish a salary range for a job, I advise against it.

Here's why.

One of the primary reasons for creating salary ranges for jobs is to establish some structure to guide salary decisions in order to ensure that they are made in a fair and consistent manner.  And if you use a standard approach to develop ranges - e.g., a midpoint established at market value, minimum at 80% of midpoint and maximum at 120% of midpoint for a symmetrical range 50% wide from bottom to top - you will accomplish this.  But if you pull quartiles from surveys and create ranges from them without ensuring a consistent pattern, you are setting up arbitrary ranges which may vary substantially in width and pattern from job to job, and which will - invariably - produce erratic and capricious salary decisions.  Sound like a good idea to you?  Me neither.

Better instead to use a consistent and well-thought-through approach to creating ranges - either from market values or from values generated through an internally-based job evaluation approach.

2007's Most Successful Compensation Strategy

In the fall of each year, I conduct a survey of compensation strategies, practices and trends in my marketplace.  My favorite question on the survey is this one:  "What compensation strategy or tactic did your organization find most successful in attracting, retaining and motivating employees this year?"  Analyzing these responses is always a fascinating exercise as they reveal interesting information about the most pressing reward needs and priorities for the year.  And now that I have been asking this question in the survey for a number of years, I have the ability to watch this shift over time.

• For 2004, the top strategy/tactic was variable pay.  It seemed that, following a few years of economic difficulty (and, for some organizations, tight constraints on salary increases), everyone's "pay for performance" energy was going into incentive plans.
• In 2005, the number one strategy/tactic was market competitiveness.  After falling behind market as a result of several years of financial and business constraints, many organizations were taking steps to restore their compensation programs (and, in many cases, actual employee pay levels) to competitive levels.
• In 2006, two strategies/tactics floated to the top, one barely ahead of the other.  Variable pay regained its number one spot, but only by a small margin.  Coming in a close second was improvements to benefits.  As the job market began to tighten, employee benefit programs (many of which had languished or even been cut back during years of fiscal difficulty) were now seen as key tools for attraction and retention and were becoming the focus of improvement and new investment.
• For 2007 - tah dah - it's variable pay again, this time by a sizeable margin.  All manner of variable pay initiatives are mentioned: creating new and improving current employee incentive plans, implementing and updating employee recognition programs, and putting in place new hiring or referral bonuses to support staffing efforts.  My interpretation?  It's all about rewarding performance - and performers.  As the war for talent rages on, we want to pay our best people well, and we are losing faith in our ability to do that with merit increases.

WorldatWork's 2007/08 Salary Budget survey, released a few months ago, confirms the continuing interest in and attention to variable pay as a compensation element, reporting that 80% of participant organizations are using variable pay (up from 79% in 2006 and 76% in 2005).

Will variable pay continue to dominate our compensation attention into next year - or will business, economic and/or political circumstances pull other elements into the spotlight?  It is always interesting to watch!

New Study Highlights Private Company Incentive Practices

A recent study conducted by WorldatWork and Vivient Consulting LLC sheds much needed light on the topic of incentive pay practices in private companies.

With permission from WorldatWork, I share a few highlights here:

Plan Prevalence

Short-term (or annual) incentive pay is used extensive at private companies (79% report having such a plan), but long-term incentives are not.  Only 35% of participating companies report having an LTI in place (compared to public companies, where my research would suggest LTI prevalence of 65%-70% or more).

Short-Term Incentives

The median STI budget (approximate), as a percent of operating income, reported by study respondents is 6% - an interesting and helpful finding.  More than half of participating companies (57%) use a bonus pool to structure and fund their STIs, and most (74%) report that subjectivity is used in plan award decisions.

Long-Term Incentives

Of respondents whose companies offer LTI plans, approximate one third (34%) use stock options and one third (33%) use cash-based performance awards.  Restricted stock, an increasingly popular vehicle for public companies, is used by only 14% of the private companies surveyed; a reflection of the reluctance of private companies to grant/share real ownership.  Those surveyed offer modest equity pools (shares set aside for current or future employee LTI grants); more than half report pools of 10% or less (of total equity).

Jim Stoeckmann CCP, a WorldatWork staff member involved in the study, tells us:

This study is significant in providing trend information on compensation and pay practices for private employers.  While there are many sources of information of this type for public employers, it's more difficult to find published information for private employers.  This survey provides an invaluable resource for those designing pay plans for private employers.

I would agree with Jim that this is a unique resource for those charged with developing short-term and especially long-term incentive plans in private companies.  My experience in this arena would suggest that, although LTIs are not very prevalent in private companies (due to a number of challenges, not the least of which is either a reluctance to share equity or the lack of a market for the equity that will be shared), these employers are feeling increasing pressure to create longer-term reward vehicles for a number of reasons - from competitive practice to the need to align the efforts of key employees with company success over a longer timeframe. 

The full and detailed research report is available on a complimentary basis to all WorldatWork members on the Association website.  Nonmembers may inquire about purchasing a copy by contacting WorldatWork directly.

On Fully Mobilizing Human Minds

In an interview on innovation in management featured in the McKinsey Quarterly (2008, No. 1), author and strategy guru Gary Hamel talks about the need to radically change how we design and manage organizations.  I particularly liked this quote:

The old model was, “How do you get people to serve the organization’s goals?” Today we have to ask, “How do you build organizations that merit the gifts of creativity and passion and initiative?” You cannot command those human capabilities. Imagination and commitment are things that people choose to bring to work every day—or not.

Hamel also shares some interesting thoughts on where the art & science of management is headed in the future:

Increasingly, the work of management won’t be done by managers. It will be pushed out to the periphery. It will be embedded in systems. I think we’re on the verge of what I would call a postmanagerial society. The idea that you mobilize human labor through a hierarchy of overseers and bureaucrats and administrators is going to look extraordinarily antiquated a decade or two from now.

And:

There is a danger ... of creative apartheid. Too many executives seem to believe that while a few people in the company may be really clever and creative, most folks aren’t. When you look at companies like Toyota, you see their ability to mobilize the intelligence of so-called ordinary workers. Going forward, no company will be able to afford to waste a single iota of human imagination and intellectual power.

An interesting article that's well worth checking out.

Why Employees Leave - Employees & Employers Don't Agree on Reasons

The landscape of employee retention is shifting, and employers are falling behind the curve in understanding the top reasons employees leave, according to the 2007/08 Global Strategic Rewards Study by Watson Wyatt Worldwide. 

Findings from global surveys of 946 companies and 13,000 employees show that while workers rank stress the top reason they would leave their organization, stress is not even among the top five reasons cited by employers.  Base pay is cited as the #1 reason by employers, but comes second to stress levels for employees surveyed.

The top five ranked reasons from the study as to why employees leave organizations, from employee as well as employer viewpoints, are highlighted in the table below.

Employees, particularly those in our emerging workforce, tell us that money is important - and I guess the above findings would suggest that we're hearing this.  The danger is in employers believing that its the only important thing - or that enough of it will compensate for a stressful, unhealthy work environment.  The results of this study would suggest that those organizations willing to take steps to mitigate the toll of today's high demands and frantic pace of business on their staff may be the ultimate winners in the retention wars.

The Carnival of HR is Up - Major League Baseball Style!!

Check out the latest edition of the Carnival of HR hosted by the HR Capitalist. With the World Series right around the corner, Kris has a great array of posts rallied around a Major League Baseball theme.  To quote Evil HR Lady, a real home run!

Pay for Performance Plan Announced for New York City Teachers

An article in today's New York Times reports that the Bloomberg administration and the New York City Teacher's Union have announced an agreement on a pay for performance plan that will give teachers the opportunity to earn bonuses based largely on the tesst scores of students at schools with high-poverty populations.

Merit pay programs for teachers, a departure from tradition, seem to be gaining ground across the country; I am watching this happen first hand as my local public school system moves forward with the development of their own plan.  The high profile breakthrough in New York City will probably add fuel to the trend.

New York City's plan is a somewhat unique one, appearing to incorporate both group reward elements as well as teacher participation at the local school level.  According to the Times article:

New York’s plan is a twist on the traditional concept of merit pay. Pots of money will not be distributed teacher by teacher, but be given to schools that do a good job raising students’ test scores.

This year, about 200 of the city’s more than 1,400 schools that the administration characterizes as “high needs,” based largely on how poor their students are, will be eligible for about $20 million in bonuses. If they meet certain performance goals, they will receive an amount that totals $3,000 per teacher. Next year, officials said, at least 400 schools will be eligible.

It will be up to “compensation committees” at each school made up of teachers and principals supervisors to divvy up the money as they see fit. They could choose to distribute it evenly among union members or single out high performers.

Related Posts:

Pay for Performance Agreement (for Principals) Announced for New York City Schools

Pay for Performance Depends on Differentiation

A recent conversation with a group of organizational leaders reminds me of a conceptual struggle many employers face with respect to paying for performance.  The notion of pay for performance rests, by definition, on a foundation of differentiation.  It is conditional on the ability, and the willingness, to differentiate employees by their individual performance.  It is based on the notion that different levels of employee performance will be (accurately) recognized and rewarded with different levels of pay.

Organizations which embraces the idea that all employees are outstanding and make exceptional contributions (rightly or wrongly), organizations that are philosophically unwilling to identify and address individually performance differences, or organizations that cannot or will not make the investment in a performance management program that allow them to genuinely and fairly discern performance differences - these organizations must do some real soul searching to determine whether they truly can or even should pay for performance.  Not every employer can or should go this route; the key here - I believe - is honesty and transparency about where the organization stands. 

Too Fancy? Thoughts on Weighting Schemes for Pay Survey Data

Whether we are using sophisticated software products or basic Excel spreadsheets to organize and analyze compensation survey data, we compensation professionals have a tendency toward using elaborate weighting schemes in developing overall market values for jobs.

What do I mean by this?  Well, let's say you are "market pricing" (gathering competitive market pay data on) a Software Development job.  Let's further say that you've identified three good "matches" from three separate salary surveys for this job, as noted below:

Survey 1:  Job title - Software Developer

Survey 2:  Job title - Software Developer - Intermediate

Survey 3:  Job title - Software Engineer 2

A simple approach would be to weight each of these survey jobs equally - or, essentially, calculate a simple mean or average of their values.  A more complicated approach would involve developing a "composite" (a weighted average of sorts) which reflects weighting each survey job differently.  For example:

Survey 1:  Job title - Software Developer (10%)

Survey 2:  Job title - Software Developer - Intermediate (60%)

Survey 3:  Job title - Software Engineer 2 (30%)

Why, or on what basis, would we treat these survey jobs differently?  Reasons abound and can include (but are not limited to):

1. A desire to reflect the fact that some survey matches are a better fit than others
2. A desire to reflect the fact that some survey sources are a better fit than others
3. A desire to place more or less emphasis on a particular industry sector or geographic area
4. A desire to weight each survey job proportionate to the number of employees it represents (e.g., a piece of data that reflects the pay rates of 400 employees would be weighted twice as much as one that reflects the pay rates of 200 employees) or, in other words, to develop an "employee-weighted" average.

My take?  I have to say that I lean toward simplicity, and advice my clients accordingly.  The simpler the survey weighting scheme, the better - unless there is a logical and compelling reason to get "fancy" (and sometimes there truly is).  In my experience, however, getting fancy often becomes a slippery slope to a place that is difficult to explain and defend.  Not a good place to be in these times of greater pressure for pay program transparency.

P.S. If you must get fancy, make sure and clearly footnote your weighting approach and rationale.  You - and anyone who must follow behind you and unravel your logic - will be glad you did.

IT Pay Around the World

Pay for IT (information technology) employees is highest in Switzerland and lowest in Vietnam, according to a newly released Mercer survey 2007 IT Pay Around the Globe which compares the total annual cash and total remuneration for IT staff in 35 different countries.

According to the survey, 6 of the world's 10 highest-paying countries for IT Managers are in Western Europe.  Switzerland is tops, followed by Denmark, Belgium and the UK.  The U.S. and Canada are ranked 6 and 8, respectively.  The lowest paid IT employees tend to be those in Asian markets.

Average gross annual total cash compensation for IT Managers in the ten highest paying countries, according to survey results, is highlighted below:

1. Switzerland
   • Local 176,920
   • USD $140,960
2. Denmark
   • Local 722,310
   • USD $123,080
3. Belgium
   • Local 95,380
   • USD $121,170
4. United Kingdom
   • Local 62,180
   • USD $118,190
5. Ireland
   • Local 85,200
   • USD $108,230
6. United States
   • Local $107,500
   • USD $107,500
7. Germany
   • Local 84,020
   • USD $106,730
8. Canada
   • Local 106,000
   • USD $93,860
9. Hong Kong (China)
   • Local 702,720
   • USD $90,340
10. Australia
    • Local 115,480
    • USD $88,850

Average gross annual total cash compensation for IT Managers in the ten lowest paying countries, according to survey results, is as follows:

• Vietnam
  • Local 15,470
  • USD $15,470
• Bulgaria
  • Local 34,250
  • USD $22,240
• Philippines
  • Local 1,106,700
  • USD $22,280
• India
  • Local 1,120,490
  • USD $25,000
• Indonesia
  • Local 289,155,000
  • USD $31,720
• China (Shanghai)
  • Local 265,810
  • USD $33,770
• Malaysia
  • Local 129,930
  • USD $35,260
• Czech Republic
  • Local 791,430
  • USD $35,880
• China (Beijing)
  • Local 285,130
  • USD $36,220
• Argentina
  • Local 133,040
  • USD $43,180